Short-term vs. long-term loans

7 February 2019

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How much time should you take to pay off that loan?

Looking at a personal loan’s APR can help you compare offers, but it doesn’t give you the whole picture of how much it’ll cost. How long you take to pay back your loan can have just as big of an impact on the price. A shorter term might be a higher immediate expense, but it could save you in the long run.

How do different terms affect the cost of a loan?

How long you take to pay back a personal loan directly impacts your monthly repayments and how much you end up paying in interest overall.

Short loan terms. These come with higher monthly repayments because your loan is divided into fewer repayments. But since there’s less time for interest to add up, you end up paying less in the long run.

Long loan terms. These keep your monthly cost down because your loan balance is divided into more repayments. But you’ll pay significantly more in interest over the life of your loan.

Let’s take a look at an example. Say you have a $10,000 loan with a 6% APR. You have a choice between loan terms of one, three or five years. This is how it breaks down:

Loan term

Monthly repayment

Total interest

Total repayment

1 year

$860.66

$327.97

$10,327.97

3 years

$304.22

$951.90

$10,951.90

5 years

$193.33

$1,599.68

$11,599.68

In this example, the loan with the shortest term costs nearly five times less than the loan with the longest term overall. But the monthly payments on the one-year loan are over four times higher than those of the five-year loan.

How long can you take to pay back a personal loan?

The most common terms on a personal loan are three or five years. However, you can find loans with terms as short as one year and as long as seven years.

How do different terms affect the interest rate?

Some lenders such as Marcus by Goldman Sachs, Best Egg and SoFi offer higher rates for longer loan terms. You also might have to pay a higher percentage of your loan amount as an origination fee. In these cases, getting a longer loan term might not save you as much month to month while still significantly increasing the total cost of your loan.

Not all lenders advertise this, though you might notice a difference in the rates if you prequalify for multiple loan terms.

Let’s take a look at another example. Say you were applying for a $10,000 loan and considering different loan terms. Here’s how it might break down:

Loan term

APR

Monthly repayment

Total interest

Total repayment

1 year

6.74%

$864.07

$368.83

$10,368.83

2 years

7.74%

$451.09

$826.11

$10,826.11

4 years

9.74%

$252.38

$2,114.19

$12,114.19

5 years

10.74%

$216.13

$2,967.79

$12,967.79

In this example, the shortest loan term costs over eight times less than the loan with the longest term. But your monthly repayments for the one-year loan are nearly four times higher than with the five-year loan. In this case, a longer term doesn’t give you as much monthly savings and hugely increases the cost of your loan.

Payday and installment loan terms

Short-term loans for borrowers with bad credit — like payday or installment loans — don’t necessarily follow this rule. Payday loans can have terms as short as 14 days and come with APRs significantly higher than installment loans, which come with terms as long as three years.

Calculate how much your loan term affects the cost

Use our personal loan calculator to see how changing the loan term changes the short- and long-term costs of your personal loan.

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Rates last updated February 22nd, 2019

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Advantages and disadvantages of long loan terms

Advantages

Disadvantages

Potentially higher APR.

Higher total loan cost.

In debt longer.

Which is the right option for me?

While a shorter loan term has more advantages than a longer term, the high monthly repayments might make you want to think twice. In fact, you might not qualify for the shortest loan term if you have a high debt-to-income (DTI) ratio. If your monthly expenses are more than 20% of your income, longer terms might be the only option available to you.

You can get the best of both worlds by applying for the shortest term that you can comfortably budget each month. Before you compare lenders, calculate how much money you have left after your monthly bills and expenses. Leave some funds for emergency costs, and look for a loan term and APR that can give you a monthly repayment that fits that amount.

Can I pay off my loan early?

It depends on your lender. Many don’t charge prepayment penalties, meaning you could save on interest by making extra repayments.

For example, say you have some money coming in soon, but can’t afford high monthly repayments right now. Looking for a lender that doesn’t charge fees for prepayments and charges the same rates for the same loan terms could help you save on interest in the long run. However, you might have to call or prequalify to get this information.

Bottom line

Getting the shortest loan term helps you save on the total cost of your loan and in some cases might help you qualify for lower rates and fees. But a longer loan term can make your repayments low enough that they don’t affect your budget.

Frequently asked questions

Personal loans typically range from $2,000 to $50,000, though some lenders offer loans up to $100,000. How much you can qualify for depends on your lender, income, credit score and general financial health.

It depends on your financial situation. It might not be difficult if you have good to excellent credit, a low debt-to-income ratio and meet other common requirements — such as being older than 18 and a US citizen or permanent resident. Read our guide to personal loan eligibility to learn more about how to qualify.

It depends. A debt consolidation loan could give you lower rates and more favorable terms. It can also put you on a path to debt freedom if you’re in the habit of only making the minimum monthly payment on your credit card.

However, it might not be the right solution for everyone. Check out our guide to debt consolidation to learn what option works best for your specific situation.

Anna Serio is a staff writer untangling everything you need to know about personal loans, including student, car and business loans. She spent five years living in Beirut, where she was a news editor for The Daily Star and hung out with a lot of cats. She loves to eat, travel and save money.

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